Election Analysis: Invest Based on Actions, Not Rhetoric
The election of Donald Trump was a momentous political event and it is no surprise that half of the country is elated and half in shock. Our job is not to tell people who to vote for (or who they should have voted for). Our job is to evaluate economic conditions and to position portfolios for maximum probability for meeting clients’ personal goals.
Many of you have been asking us how our process responds to any event like this. One of our most cherished principles is the principle of leadership and governance, which says that when leadership of nations and governance of companies encourage human productivity, that is likely to be a good environment in which to invest. This applies to countries as well as to companies.
But note that the principles do not say that when the rhetoric of national and corporate leaders is good (or bad) for human productivity, this creates a good (or bad) environment for investing. Our approach does not focus on rhetoric, but on actions. We acknowledge that rhetoric often drives short term market fluctuations. For example, during the night of the Trump victory reactions were quite negative: US equity futures sold off dramatically and gold surged. However, over the next two days, as President-elect Trump made calm public statements, engaged in respectful and attentive meetings with the current President, and received congratulations from leaders around the world, that dramatic fear trade dramatically reversed itself. If we responded to such short-term fluctuations we would have sold what was about to go up and bought what was about to go down.
Instead, we work hard to keep portfolios from high turnover based on a changing media narrative and shifting rhetoric from leaders (or shifting reporting on leaders from media). Instead, our economic forecasts are based on demographics (which does not shift quickly) and adherence to the principles which lead to human flourishing. What drives an economy is people. It is people who produce things. But it also matters what environment that person is in. A human being in an environment of adaptable labor markets, a culture which encourages entrepreneurship and allows competition to spur us on, is a great environment in which to invest for the long term. What we do is to modestly overweight countries which are trending in the right direction in those areas and which are also attractively priced. In other words, we don’t move capital in response to rhetoric but to actions.
When it comes to big picture allocation, that is allocation between asset classes such as equity and debt, or between large blocks of countries such as developed and emerging, we produce macro-economic forecasts which are an input to the overall process. Our macro forecasts also rely on accomplished policy results, not rhetoric from leaders or estimations from experts about political changes. If there is one thing this election cycle should teach us, it is how very wrong experts can be about what a nation will do. We do rely somewhat on demographic forecasts, but demographics are a slow-moving metric and (absent plague or world war) a fairly predictable one.
We think that depending on actual events, rather than on expert opinion about what events will happen, is not only the humble approach, but also the right approach. Over the long run, markets respond to actual growth that results from actual positive policy shifts.
But what if rhetoric did turn into policy, both domestic and international? What might that look like? In general, the Trump domestic economic policy agenda is pro-growth: it takes US business taxes which are the highest in the developed world and lowers them. It also generally lowers tax rates and tax compliance complexity. It also includes a moratorium on new regulation, and anyone who works in finance knows how very burdensome these regulations have become.
Not all is necessarily positive: for example, Trump policies involve more in tax cuts than they do in spending cuts, so higher deficits could well be a problem. Our modeling does take into account ‘fiscal fitness,’ and as it actually improves or declines under a Trump administration, the portfolio model will change along with it.
The greatest uncertainty is protectionist trade policies. These are associated with serious economic consequences historically. It’s hard to know what the effects might be, because the detailed policy prescriptions released by the Trump campaign were focused on domestic policy, whereas the observations about trade were addressed more in impromptu moments in speeches and debates. These are areas in which an actual policy shift would and should be reflected in our modeling.
Originally published on Vident Financial.